The Lowdown from Investment Quorum

October 29th, 2018

Global Markets to 29 October 2018 Highlights Global equity markets resume their downward trend as negative sound bites take control. US technology stocks continue to lead the sell-off on mixed corporate earnings numbers and future guidance. Indecision over Italy’s proposed 2019 budget, Brexit and deteriorating relations between Saudi Arabia and the rest of the world […]

Global Markets to 29 October 2018

Highlights

US technology stocks continue to lead the sell-off on mixed corporate earnings numbers and future guidance.

Indecision over Italy’s proposed 2019 budget, Brexit and deteriorating relations between Saudi Arabia and the rest of the world create real tension in the marketplace.

The latest equity market sell-off fuels further gains in US Treasuries as investors seek safe haven assets such as sovereign bonds, currencies and gold.

Crude oil prices have dropped 12% in October as mutterings of a possible oil glut from OPEC members spook the energy market.

While Octoberphobia has been savage, generating higher volatility levels, we still see strong economic fundamentals supporting corporate earnings growth throughout next year.

Global Market Summary

There are always “dark days in the stock markets” and since this bull market began back in March 2009 we have experienced around 62 panic attacks including this one. On each of those 62 occasions, the markets have given both professional and retail investors a reality check, leading to some very volatile days.

Unfortunately, nobody is able to predict the top, or the bottom, of the markets 100% of the time. Accordingly, adopting long-term time horizons tends to be the best strategy. However, it also makes sense to “buy on the dips” or indeed “sell into strength”, when stock markets look to be suffering from bouts of irrational exuberance. Remember Warren Buffett once said, “be fearful when others are greedy and greedy when others are fearful.”

Octoberphobia: the crashes of 1929, 1978, 1979, 1987, Friday 13th 1989, the painful 733-point drop on 15 October 2008 and of course, this year’s dreadful correction. But history has taught us to keep calm, assess the situation, check to see if any fundamentals have really changed, and then act accordingly.

So, has anything really changed? The answer is yes. However, there are two important reasons for the recent pick-up in market volatility. First of all, the noise that creates daily anxiety and panic attacks. Secondly, fundamental changes that tend to adjust the markets to accommodate any future change in the economic backdrop.

Regrettably, we are not able to address the first point, “noise in the markets”, and anyway that would be ill-advised. So we turn instead to the issue of fundamental changes. In our opinion, we see three significant issues to take into consideration. The withdrawal of quantitative easing, monetary tightening and trade war tensions.

As far as the first, quantitative easing, the central banks are no longer coming to the aid of the financial markets every time they experience a panic attack or flash crash, indeed, markets need to show some strength and resilience by standing on their own two feet, given that 10 years after the collapse of Lehman’s, and subsequent financial crisis, we are in a far better, healthier place.

As for the trade wars, there are no quick fixes, only short-term winners and losers, and so trade tensions and protectionism, is here to stay and could last for years. Similarly, populism has become a game changer in the world’s political landscape, creating difficulties in some of the world.

Let’s consider the issue of monetary tightening. In our view is the most significant fundamental change that we now face. Clearly, since the US central bank has begun raising interest rates the financial markets have started to readjust. Initially, the yield on the 10-year US Treasury bond rise above the physiological 3% barrier, while this month, the equity markets become very volatile, as shown by the extreme rise in the VIX Index, the index known as the fear gauge.

The market consensus view is that the Fed will announce a further 0.25 basis point hike in December, with a further three to four rises of a similar mount next year. But already been a number of disagreements between the White House and the Federal Reserve Bank as to the actual timing of these rate hikes. Obviously, this has been bad for both market sentiment, or the investor over recent weeks, and in our opinion – unnecessary fear and panic. Could the Fed reverse out the recent market decline by delaying any further rate hikes in December? That could be one possibility, but let’s see how the US economy develops over the coming weeks.

Whilst it is true that we might see a softening of global GDP over the coming months, we still see strong economic fundamentals supporting corporate earnings growth for the rest of this year and next. By the same token, any suggestion that the US is heading for a recession also seems premature.

Likewise, anxieties over inflation seem unwarranted at this time; in fact, if regions such as Venezuela, Argentina and Ukraine. But then, we do live in a world of technological innovation, global competition and ageing populations which have ramifications for the world’s future inflationary backdrop.

And so as we come to the end of this month – another irrational October for the history books, it is very important for investors to focus on the fundamentals, disregarding the day-to-day noise. That is not to say that major issues such as Italy’s budget confrontation with the European Union, the emerging markets entering bear market, the latest incident involving Saudi Arabia or Brexit will not influence the markets, retail investors or volatility – they will, but from an investment perspective we view this pull-back as a buying opportunity and not a reason to panic.

This would appear to be a good time to review your global portfolio and perhaps improve its resilience against a more demanding investment backdrop. “Pedal to the metal might not be such a good idea, but neither is slamming on the breaks, given that we still see some very good investment opportunities, in fact, what this month’s correction has done for long-term investors is to be able to “buy quality at cheaper prices”. And with the Santa Claus rally possibly just around the corner.

Peter Lowman is the Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.

This article does not constitute specific advice and investors should bear in mind capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.

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